Movement in Oil Indexed Gas Contract Pricing?
In an indication that there may be significant movement on the dispute between gas suppliers to the European market and their customers, German utility RWE AG has reported that it has made progress in talks to revise pricing of long term contracts.
RWE Chief Executive Juergen Grossmann said the company has agreed with "major international oil and gas companies" to either index existing contracts to wholesale gas prices or terminate them prematurely.
Without citing specifics, RWE’s Chief Financial Officer Rolf Pohlig said that the company has struck deals with three producers.
"For us it was important that several producers have accepted that the oil-indexation no longer works and have agreed to terminate [or adjust] some contracts," Pohlig said.
Speaking at the launch of the Nord Stream gas pipeline earlier this week, Gazprom Export Chief Executive Alexander Medvedev appeared to indicate that a compromise on pricing concessions was likely.
Many European gas distributors are seeking relief from high contract gas prices resulting from long-term gas deals with suppliers such as Gazprom and Statoil ASA.
The contracts are oil-indexed, i.e. linking import rates to oil prices, while firms such as RWE are forced to sell gas to customers at lower retail prices linked to the freely traded spot market.
"Gazprom appears to be prepared to provide additional price reductions top of the 15 percent spot indexation it has already given to German and French utilities and the 10 percent is has given to Italian utilities ENI and Edison SpA," said Thierry Bros, a gas analyst at Societe Generale. Gazprom has also provided pricing concessions to Greek gas company DEPA.
In August, E.On Ruhrgas said it would seek arbitration in its row with Gazprom over long-term gas supply contract terms.
On Monday, Polish gas monopoly PGNiG filed a procedure international arbitration courts against Gazprom to cut import prices under a long-term supply deal.
RWE procures around 47 billion cubic meters of gas a year, Pohlig said. Some 24 billion cubic meters is linked to the price of oil, and of this some 4 billion cubic meters is resold through oil-indexed prices.
"Our overall exposure to oil-indexed gas procurement contracts is therefore around 20 bcm," he said.
Bros said that a compromise between Gazprom and European customers would put pressure on Norway's Statoil.
"The focus will shift to Statoil, whose contracts are up for renegotiation from October 2012," he said.
Statoil approved a blanket discount to its European clients of a 25 percent indexation to spot markets during initial renegotiations, according to Bros.